Capital gains tax receipts climb 3% to record-high
HMRC collected a record of £9.9 billion from capital gains tax receipts in 2019/20, according to official statistics published last month. The tax authority said this was 3% up on the previous tax year’s receipts, but the number of taxpayers paying tax on their gains fell 6% to around 265,000. Most of the liabilities collected came from 1% of taxpayers who made the biggest gains in 2019/20, with 41% of the receipts coming from those who made gains of £5 million or more.
More than a quarter (28%) of these revenues (£2.8bn) came from the disposal of business assets that qualified for entrepreneurs’ relief, e.g. shares in trading companies, where owners sought to take advantage of the £10 million threshold before this was significantly reduced to just £1 million from 11th March 2020. This is no surprise as gains qualifying for entrepreneurs’ relief were taxed at 10%, so by selling earlier owners were apply to pay up to 50% less tax than if they completed the sale after the threshold was reduced.
In addition to the rise in CGT collections in 2019/20, it is anticipated that this tax will have also shown high returns in 2020/21, as the renaming of ‘entrepreneurs’ relief’ to ‘business asset disposal relief’ from 6th April 2020 sparked widespread concern that the relief would be scrapped altogether, leading to further disposals of business assets in 2020/21 in order to secure the same, up to 50%, tax saving. In 2021/22, basic-rate taxpayers pay tax at 10% on gains above the annual exemption, while those in the higher-rate and additional-rate income tax bands pay 20% on disposal of most assets.
Higher capital gains tax rates – of 18% and 28%, respectively – can apply when selling certain assets, such as investment properties or second homes that have significantly increased in value over time. Earlier this year, Chancellor Rishi Sunak froze the capital gains tax annual exemptions at £12,300 for individuals and £6,150 for trusts up to and including April 2026.
With asset prices increasing and the annual exemptions frozen, it stands to reason that more taxpayers could be impacted by paying capital gains tax over the coming years. An increase in capital gains tax rates also appears more likely than any other fiscal policy tweak, after the Office for Tax Simplification (OTS) published two capital gains tax reports containing a raft of recommendations.
Last year, the OTS suggested the Government should align capital gains tax with income tax, and reduce the annual exemptions because it’s current structure “distorts behaviour” and creates “odd incentives”. Speculation of rate hikes is prompting some taxpayers to plan disposals in 2021/22, to beat any kind of reform that could potentially kick in from next April.
For further information on tax, please contact Gemma Hedges on 023 8046 1259.